INTERDEPENDENCE OF EC ECONOMIES:A VAR APPROACH

Fernando Ballabriga, Miguel Sebastián and Javier Vallés

SERVICIO DE ESTUDIOSDocumento de Trabajo nº 9314

BANCO DE ESPAÑA

BANCO DE ESPANA

INTERDEPENDENCE OF EC ECONOMIES: A VAR APPROACH

Fernando Ballabriga. Miguel Sebastian and Javier Valles (*)

(*) Femando Ballabriga, ESADE and Banco de Espafia; MigueJ Sebastian, U. Complutense and Banco de Espaii.a; Javier Valles, Banco de Espafia. We are grateful to L. J. Alvarez, J. Dolado and 1. Mann for their comments and to A. Ricardo for data SUppoll.

SERVICIO DE ESTUDIOS

Documento de Trabajo n.o 9314

In publishing this series the Bank of Spain seeks to disseminate studies of interest that will help acquaint readers bener

with the Spanish economy.

The analyses, opinions and findings of these papers represent the views of their authors; they are not necessarily those

of the Bank of Spain.

ISBN, 84-7793-230-1 Dep6sito legal: M-16560-1993 Imprenta del Banco de Espaiia

1. INTRODUCTION

One of the main issues that arises in the discussion of the

European Monetary Union is that of the transmission mechanism of

external shocks within member states. The loss of the nominal exchange

rate as a policy instrument for accommodating these effects is minimised

when the integrated economies suffer common shocks with symmetric

impact. When shocks are asymmetric, either in their origin (country

specific) or in their transmission mechanism (a common external origin,

but different domestic impact), the lack of the nominal exchange rate

could be important. The document "One Market, One Money" (CEC

(1990» argues that the economic and monetary union will reduce the

number of asymmetric shocks and their effects for each of its members.

An initial task in this debate is, therefore, to attempt to quantify the

relative importance of external shocks to the different European economies

and to explain their transmission mechanism. The effectiveness of nominal

exchange rates as a policy instrument also depends on the persistence of

the shocks. In the presence of persistent shocks, the only effect of

nominal exchange rate arrangements is to delay the adjustment of real

variables. Consequently, the question of the time impact of the external

shocks is also of interest.

In this paper we address these issues taking four European

economies: Germany, France, the United Kingdom and Spain. We take as

"common" external shocks those relating to the international oil price, the

US output and the US interest rate; and as country specific, those

relating to output, inflation and interest rate for each of the European

countries. The model used to characterise the interdependence mechanism

is a V AR for the complete set of variables.

Obviously, we do not intend a detailed modelling of these

economies; we seek rather to represent their respective developments by

focusing on the three chosen macroeconomic indicators. By doing this we

explicitly forgo the possibility of identifying, for instance, disturbances

stemming from the fiscal and labour market sides; in fact, shocks to

variables in the model are to be interpreted as linear combinations of all

the disturbances that hit the economy.

- 3 -

With this model we assess the relative importance of external

and internal sources of European fluctuations. We also compare the

different transmission mechanisms of external shocks so as to characterise

symmetries in terms of the sign of the disturbance, its magnitude and its

persistence. We try to establish, for each variable, whether there is a

leader country within Europe. Finally. we investigate how dependent

those results might be on different co-operation mechanisms, in particular

to alternative exchange rate regimes.

The paper is structured as follows. Section 2 briefly describes

the methodology and the specifics of the estimated model. Section 3 uses

the variance decomposition and impulse-response results to characterise

the degree of openness of European economies and the transmission

mechanism of shocks for the whole sample period 1964-1991. Section 4

reports on the robustness of results to specific changes of the

restrictions used to identify the model. Section 5 analyses the differences

detected between the periods before and after 1979. Section 6 offers

conclusions.

2. THE VAR APPROACH

2.1. METHODOLOGY

Our analysis assumes that the n-dimensional observable vector

Y is determined at each t according to the model

(1) Y(t) = X(t) B(t) + E (t)

where

-4-

X(t)

x (t)' ,

(Y(t-l)'

. . • Y(t-m)'

D(t)'

)

1=1, . . . ,n

, , , fi(t) = (fi,(t) • • • fi,(t) )

fi(t) = Sfi(t-l)+u(t)

e (t) I Ft - N(O,E.)

u(t) I Ft - N(o,E)

E, U independent

D(t) is a d-dimensional vector of deterministic variables, so Xi (t) and

31(t) are k-dimensional vectors, k=mn+d. Ft is the information set at the

beginning of period t.

VARfs are weakly restricted models and, in this sense, highly

useful for analysing sample evidence without conditioning on prior

controversial assumptions about the working of the economy. A key goal

of the V AR methodology is precisely to make a sharp distinction between

the specification (intended to be uncontroversial) and the identification

(where disagreement is more likely to arise) processes, stating clearly the

restrictions used to identify the model. This goal explains the usual two­

step procedure followed to estimate the dynamics that underlie the

evolution of the vector of endogenous variables Y.

- 5 -

In a first step, the reduced form coefficient vector L\ is

estimated. This usually poses a degree of freedom problem(ll, which is

technically solved estimating by the bayesian method. Specifically, a prior

distribution for B is specified as a function of a parameter vector, "[ say,

that controls aspects of the prior about which we are ignorant (mean,

degree of tightness, etc). The reason for introducing the functional

dependence on "[ is that, with finite samples, we do not expect the prior

to be neutral (in the sense of not affecting the posterior), and therefore

it is necessary to have a choice criterion. A reasonable criterion is to

select the prior associated with the setting "[- that maximises the likelihood

function of the model(2). Once the prior is set, it is modified according

to the Bayes rule using the sample information; the result is a posterior

distribution, whose mean and variance provide the estimates of the

coefficients in B and their corresponding covariance matrix.

It should be emphasised that the only restriction imposed with

certainty in the first step of the estimation procedure is the maximum

number of lags allowed for, m. In particular, stationarity is not imposed,

so unit roots and cointegration relations may arise if the data suggest that

they characterise the stochastic process under analysis.

In a second step, a set of contemporaneous interactions among

the components of Y is proposed and estimated. These interactions are

intended to account for the contemporaneous correlations of the error

term E (as reflected in the previously estimated covariance matrix E£) and .

to generate a new error vector of orthogonal components, v; this is

actually why the process is sometimes referred to as the

"orthogonalisation process". But, in fact, the orthogonalisation process

amounts to identifying the model using variance"'covariance matrix

restrictions.

{l} In a model like (1) the number of coefficients to be estimated increases exponentially with the number of variables included in the system.

(2) Under regularity conditions, this provides a good approximation to a full bayesian implementation. See Doan, Litterman and Sims (1984).

-6-

Since the set of contemporaneous interactions is not unique,

alternative sets of identification restrictions are feasible, each generating

a particular structural model and possibly implying different dynamic

properties. Formally, the Identification (orthogonalisation) process

requires matrices A and 1:., be estimated such that

AE: V

and

where 1:'1" diagonal, is the covariance matrix of the disturbance vector v. Changing the identification scheme structure amounts to changing the

non-zero entries of the matrix A.

Identifying the model by simply imposing restrictions on the

set of contemporaneous interactions is not the only possibility. Some

authors also use restrictions on the sums of structural coefficients. For

instance, Blanchard and Quah (1989) impose the absence of long-run

effects of nominal shocks on real variables, a restriction which involves

imposing some zero entries in the long-run matrix of structural

coefficients.

For a more detailed description of the bayesian V AR

methodology see Doan, Litterman and Sims (1984) and Slms (1986).

2 . 2. THE ESTIMATED MODEL

The model analysed contains three variables for each of the

following countries:

Germany

France

United Kingdom

Spain

- 7 -

plus three variables from the "rest of the world", so that n=15. For the

European countries J the model includes: real output growth, inflation rate

and nominal interest rates. The "rest of the world" block includes the rate

of change of the oil price and the output growth and nominal interest rate

for the US economy(l).

The model is estimated with annual data for the period 1964-

1991 (see Appendix 1). The number of Jags included is two (m=2) and the

deterministic component (D) contains just a constant term, since no

deterministic trend was detected. The number of coefficients in each

equation is, therefore, 15x2+1=31. Given the small sample size there is no

choice but to use a bayesian approach to estimation, which avoids the

degree of freedom problem. The � vector is described in Appendix 2.

Since the prior information defined by this vector breaks the efficiency

of univariate estimation, we have estimated the system using the

multivariate version of the Kalman filter. Both the dimensionality of the

� vector and the number of lags included in the model are considered

appropiate, since the stochastic structure of the estimated reduced form

residuals does not appear to deviate from the white noise hypothesis.

The identification of the model is achieved by imposing

restrictions on the set of contemporaneous interactions. The estimated

scheme is presented in Appendix 3. A basic assumption of the proposed

set is a hierarchical structure among the countries as a function of their

relative size. More specifically, the identification scheme incorporates the

following restrictions (see Figure 1):

European shocks do not have a contemporaneous effect on the

world block.

Among world variables, the energy price is a primitive source

of variability affecting both US and European real activity and

") By focusing on growth rates, we analyse variability abstracting from stochastic trend components. The null hypothesis of absence of common stoehastic trends is accepted according to a Johansen (1991) multivariate test.

-8-

Figure 1. XDDTXI'XCATXca SCBDIB

I I I I I OUTPUT

I I • US I I r I I I _ US I I ! I I I I • I , , _ GB OUTPUT � I- J I r -.-

GI I--I • • I I I I INFLATION I I

GE I I I I • • I I I

COTPUT I � I OX and FR f--' •• I I_ OX1"d PRI I I • L r INFLATION l

OX and FR

• • ------ � -- � I OUTPUT

SP �-L

_ SP I I •

L ______ �LI __ ' _NFLA_sp_T_'O_N_...J

-9-

I

"Rest of the world"

Germany (GB)

o. ltingdom (UJt.) and Prance (D)

_ J Spain (SP)

interest rates, which may also respond to current real

activity.

US financial shocks may contemporaneously affect prices and

real activity in Europe only through financial channels (i.e.

interest rates).

Other than energy prices, only domestic variables may have

a direct current effect on European inflation rates.

Within Europe contemporaneous interactions follow the

hierarchy Germany - [France, UK] - Spain, with German

disturbances affecting the rest of Europe through real and

financial channels, France and UK affecting Spain only

through output channels, and with no contemporaneous

interaction between France and UK.

Abstracting from international effects, domestic European

variables follow a triangular output-interest rate-inflation

scheme.

3. INTERDEPENDENCE: 1964-1991

In this section we interpret the variance decomposition for the

whole sample period, 1964-1991. We also report the sign, the magnitude

and the degree of persistence of the response of each of the 12 European

variables to all innovations, both the "common external" (oil, US) and the

European "country-specific". Appendix 4 contains the whole set of

impulse-responses.

3.1 DEGREE OF OPENNESS OF EUROPEAN ECONOMIES

Tables [1] to [3] contain the average variance decomposition

of the one and six periods ahead forecast error of the European variables

-10-

and its corresponding standard error(4). In the left panel of each table

we present the percentage variance of each series explained by the

"common" or "world" shocks: innovations in the international oil price, in

the US real output and in the US nominal interest rate. The right panel

contains the variance decomposition in an aggregate fashion: for each of

the European variables we sum the percentages explained by the variables

of each other country, the base country excluded. For example, in Table

[1], on average, 3. 6% of the variance of the German output was explained

by European shocks: 1.5% by France's variables (French output, inflation

and interest rates), 2. 1 % by UK variables and none by Spanish

variables(5). We will discuss the degree of interdependence from a

double perspective: a country-by-country analysis and a

variable-by-variable one.

Discussion of real output transmissions are frequent (the

"locomotive" argument). They are, however, rarely quantified. In Table

[1] we present a quantification. There are substantial differences across

European economies regarding the sources of output variability. Germany

and the UK are most open to world shocks: more than a third of their

output variability is explained by the "common" shocks (oil shocks and US

variable innovations). On the other hand, Spain and France are most

dependent on European variables. Such similarities for the last two

countries regarding real output fluctuations have also been found in other

studies (6). Proceeding on a variable basis we detect, again, interesting

asymmetries: the US output innovations are the main external source of

German GDP fluctuations (30% of its variance), but the oil price is the

crucial external shock for the UK output (it explains more than 20% of its

variance). This runs against the often claimed "locomotive" linkages

between the US and the UK real GDPs. The "locomotive" linkages seem to

(') The numbers in the Tables are the result of a Montecarlo experiment involving 200 draws from the posterior distribution of the reduced form coefficient vector.

(5) The average effect of German variables on German output can be obtained from the difference between 100 and the sum of the total effects from the World and the Rest of Europe, that is : 100 - 34. 9 - 3. 6 = 61. 5%

(6) See Dolado, Sebastian and Valles (1993)

-11-

� I

'rable 1

VJUUAIICB DlIOI»IPOSITIOIII PBRCBRTAGB 01' BOROPBM 0UTPD'.l' VARIARCB BXPLAIIIKD BY WORLD ABD JroROPBA1f (UCBPT OIIR) SBOCltS

IIORLD REST OP BUROPB( 1)

TOTAL OP YlIS RUS 'l.'OtAL GJIRMl\IIY PRlIBCB lJl( SPAIN

GBRIIIIRY 34.8 3.6 30.1 1.1 3.6 • 1.5 2.1 0.0 I (4.1) ( 2.2) ( 3.8) ( 1.2) (2.1) ( 1.0) ( 1. 7) (0.0)

PRlIBCB 16.8 4 . 3 11.2 1.3 3 5 . 8 3 3 . 1 • 2.7 0.0 I ( 5.0) (2.7) ( 3 .9) ( 1.9) ( 3.7) ( 3.6) ( 1.9) (0.0)

, lJl( 37.4 20.2 16.4 0 . 8 8.0 6.5 1.5 • 0.0

( 4.2) (3.3) (4.2) ( 1.0) (1.9 ) ( 1.3) ( 1.1) (0.0)

SPAIN 21. 5 3.6 16.7 1.2 35.0 21.8 9.6 3.6 •

(5.8) ( 3.3) (5.4) ( 1 .6) (4.4) ( 3.5) ( 2.3) ( 3.0) "

Note: The number in each cell is the average of the variance decomposition and its corresponding

standard error in the first and sixth forecast error.

( 1) ith. country output variance explained by country jt'i output plus prices plus interest rate

shocks.

-w I

Table 2

QRIAIICB DBOOMPOSITIOIIs PBRCBIITAGB OF BOROPBAII IRPLATIOIl VAlUARCB BIPIAIIIBD BY WORLD IUID BUROPBJUII (llCIIPT OIIR) SIIOCltS

lIDRLD RBST OF BOROn( 1)

roTA!. OP YUS RUS roTA!. GIIRMIIIIY PRlIIIICII tJJ< SPArll

GIIRMIIIIY 24.2 5.0 3.6 15.6 5.1 • 2.6 2.5 0.0

(4.8) ( 2 . 2) (4.2) (4.4) (2.5) ( 1.9) (1.9) (0.0)

PRlIIIICII 29.8 16.9 3 . 4 9.5 9.1 6.2 • 2.9 0.0

(5.4 ) (4.9) (4.0) (3.4) (3.3) (2.8) ( 2.3) (0.0)

tJJ< 15.1 6.4 6.5 2 . 2 8.3 5.9 2.4 • 0.0

(4.6) (4.0) (3.3) (1.4 ) (3.1) (2.4) (1.8) (0.0)

SPAIR 17.9 10.8 4.2 2.9 14.7 6.9 3.7 4.1 •

( 5.7) ( 5.1) (3.2) (1.9 ) (4.0) (3.6) (2.1) (2.9)

Note: The number in each cell is the averaqe of the variance decomposition and its correspondinq

standard error in the first and sixth forecaat error.

(1) ith. country inflation variance explained by country j ... i output plus prices plu.s interest rate

shocks.

-... I

Table 3

VARIAIICB DBCCIIPOSI'l'IOII: PBRCBR'l'AGB OF BUROPBAlI IRTERBST RATE VARlARCB BIPLAIlIBD BY WORLD

MD II1lROPBIUI (""CRPT """, SHOCKS

IIORLD RBST OF BOROPB(l)

TOTAL OP ros RUS TOTAL GIIRMl\lIY l'Rl\RCR llI< SPAIN

GIIRMl\lIY 52.7 5.5 4.6 42.6 3.5 • 1.4 2.1 0.0

( 3.3) ( 1 . 7) ( 3.5) ( 3 . 6) ( 1. 7) (.9) ( 1.5) (0.0)

PRlI1fClI 59.4 10.3 3.1 46.0 10.5 B.6 • 1 .9 0.0

( 3 . 1) ( 3.B) ( 1 . 6) ( 3 . 3) (2.4) ( 1.9) ( 1.3) (0.0)

llI< 39.1 4 . 1 B.7 26.3 B.7 6.B 1.9 • 0.0

(4.B) ( 2 . 5) (6.0) ( 4.1) (2.5) (2.0) ( 1 . 4) (0.0)

SPAIB 39.4 4.5 4 . 3 30.6 l1.B 5 . 4 3.4 3.0 •

(4.2) ( 3 . 2) ( 3 .B) (4.7) ( 3.5) (2.1) ( 1 .9) (2.0) I

Note: The number in each cell is the average of the variance decomposition and its corresponding

standard error in the first and sixth forecast error.

(I) ith country interest rates variance explained by country j�i output plus prices plus interest

rate shocks.

run from the US to German output first, then from Germany to other

European economies. The relatively low weight of the oil price shock in the output fluctuations of the European countries "excluding the UK is also

surprising, a possible indication of those shocks being accommodated.

Regarding intra-European output interactions, the UK and

Germany are the most closed economies, their output being very weakly

dependent on the rest of the EC countries. France and Spain's output

variance are, however, 35% attributable to European variable innovations.

These economies are the least explained, in relative terms, by their own

shocks (roughly 45%, while the proportion is 55% for the UK and more than

60% for Germany). The transmission mechanism runs, basically, from

Germany to France and Spain, the rest of the interactions being of a lower

magnitude. As an exception we should mention the importance of France's

variables in Spanish output (on average, 10% of the total variance),

which is not far from being as important as the US output and twice the

oil price. This is consistent with the close ties linking Spain historically

and geographically to France, its most significant trade partner. Some

interaction between the UK and Germany is also detected in the paucity

of intra-European interrelations. The role of Spanish variables in

explaining the rest of Europe's fluctuations is, as expected, negligible.

Finally, and although not reported in the aforementioned Tables,

European variables have a negligible weight (less than 2%) in explaining

US output variability, whereas oil price shocks explain 10% of it.

To summarise, we find that idiosyncratic shocks explain a

large part of the European output variability (7) , while the oil price is,

in general, not found to be a source of important output fluctuations.

Among the four European economies considered, Germany is the most open

to US output shocks, while it is the least open to its EC partners. The UK

real activity is exceptionally sensitive to oil price shocks, while less

receptive to disturbances in the European economies. French output is

(7) Serletis and Krichel (1992) explore the degree of shared output trends among EC countries for 1962-1990, which is found to be low. However, they attribute this result to domestic policies, an interpretation favouring current coordination plans towards monetary union.

-15 -

quite independent of US real activity, but very sensitive to German

variables. Spain and France being the closest economies to Itworld It

disturbances, are the most sensitive to European shocks, in particular to

those stemming from Germany. For Spain, French variables are an

additional source of" variability.

On the inflation side the picture is somewhat different. In

Table [2] we present the variance decomposition of the European rates of

inflation. To start with, the inflation spillovers are much smaller than

those relating to output: around 40% for France, 30% for Germany and

Spain and 25% for the UK. This is consistent with inflation disturbances

being related to domestic labour markets and, possibly to a lesser extent,

to domestic monetary policies. In this sense, it is interesting that the UK

emerges as the most closed economy in terms of inflation. Also interesting

is the relatively small role of the oil price shocks in explaining the

European inflation rates, in particular for the German and the UK cases.

For France and Spain, the role of the oil price disturbances is larger, yet

below 20% of their variance. This is remarkable, given that the oil "criseslt

have usually been placed as the main source of the European inflation

processess of the seventies and early eighties. However J it may not run

counter to the findings of the countercyclical pattern of western inflation

during these decades (see Kydland and Prescott (1990), for the US,

Blackburn and Ravn (1991) for some OEeD countries, and Dolado et al. (1993) for the Spanish economy). This pattern has been attibuted to the

importance of the "supply sidelt shocks: more inflation, lower output

growth. The controversy would lie on the interpretation of the source of

the supply shock: the domestic labour markets may have been the main

source of inflation disturbances in these decades, rather than the oll

price jumps.

While the US output plays an insignificant role in European

inflation rates, for the case of German inflation (and, to a lesser extent,

French inflation), the role of the US interest rate is important. Around

15% of its variance is explained by it. However, such a linkage disappears

for the UK and Spanish economies. At a first glance, one could interpret

this dependence in terms of some coordination of monetary policies among

those countries, and the relatively larger dependence of the British and

-16-

Spanish inflation on their domestic labour shocks. We later argue that a

more likely interpretation is that the exchange rate impact of US fiscal

policies on Germany and France has been larger, and this explains the US

ability to "export" domestic inflation pressures to those countries.

However, as mentioned earlier, the reduced set of variables for each

country makes it very difficult to characterise the disturbances in terms

of either fiscal ·or monetary policies or technology shocks.

When we consider the interaction among inflation rates within

EC countries (see the right-hand panel of Table [2] ) we find that it is

surprisingly low and that there is no clear leader country as in the output

case. The Spanish inflation is the most sensitive to European variables,

but not to those of any country in particular.

The decomposition of the European nominal interest rate

volatility is presented in Table [3] . As expected, the degree of

interaction is highest at the financial level, specially for France and

Germany. The US nominal interest rate is the main source of variability

both for French rates (46%, well above its own disturbances) and German

rates (roughly 43%, as large as its own variables). For Spain and the UK

the linkage is much weaker (roughly 30%) . This is consistent with the

exchange rate effects mentioned in the inflation decomposition above. In

fact, French interest rates are the least dependent on their own variables

(just 30%) while the UK and Spain are the most domestically determined

(around a 50%) . Regarding European interdependence, the lack of

interaction among European rates as compared with US rate dependence

is again surprising. Morover, although there is no clear leader country

as in the output case, German variables explain a higher percentage than

the rest of the countries.

3.2 TRANSMISSION MECHANISMS

Here we provide the overtime average response of each

European variable to an impulse of a one standard error in an innovation

in the system. Contrary to the variance decomposition analysis, now the

actual sample variance of the shock does not matter. In this sense, the

exercise could be interpreted as the response of every European variable

-17 -

to a hypothetical shock in each other variable, given the information

contained in our sample period. The responses, up to six periods, have

been normalised by the standard erro.r of the corresponding innovation

(see Appendix 4).

We divide our analysis in to two parts: first, we consider the

European variables' responses to Itcommon" shocks; and second, we focus

on European interdependence, analysing the responses of the European

variables in the system to their own shocks.

3.2.1 Europe facing "common" shocks.

Table [4] summarises the responses of European variables to

a one standard deviation innovation in oil price, US output and US

interest rates. When the responses are monotonic we calculate the average

response of the first and the sixth period. If they lie on the interval [0,

0. 02] we consider them "null"; if in [0.02, 0. 05] "almost null"; in [0.05,

0. 30] Itlow"; in [0. 30, 0. 50] "highlt; and above 0. 50 "verybigh". If they

are not monotonic we take averages of the positive and negative values

separately. We define a response to be "persistent" when the impact is

still significantly different from zero after five periods.

Regarding output interaction (first row of each country), we

find a symmetric response to US output innovations (second column): for

an identical US positive shock, all the European countries' GDP will react

positively, in a large amount (between 15 to 50 percent of a standard

deviation) and in a persistent way. Similarly, there is a quite symmetric

response of European output to US interest rates, with almost null effects

for all countries. We therefore conclude that, from an European output

perspective, these shocks are "symmetric It in the sense of fulfilling the

two conditions: (i) having a common origin; and (il) having symmetric

transmission patterns both in size and persistence. However, the oil price

shocks, in spite of having the same origin, are far from symmetric. In

fact, although there is a general negative output impact of an oil price

jump, the magnitude of the contemporaneous effect and specially the

dynamic pattern differs across countries: for Germany and France, the

response is low and transitory; for the UK, high and persistent, the

-18-

� <D I

Table 4

AVBltAGB RBSPOIfSB OF BOROPBAlf VAlUABLBS 1'0 "<X.'1G«8 SIIOCKS"

0. YOB

--0U'l'PtJT (-) LOW, T (+) HIGH, P

IIIPLATIOR (+) LOW, T (+) LOW, P

IRTBRBST RAft (+) LOW, T (+) LOW, P

.... CB 0U'l'PtJT (-) LOW, T (+) HIGH, P

IIIPLATIOlt (+) VERY HIGH" P (+) LOW, P

IRTBRBST RAft (+) VERY HIGH, P (+) LOW, T

Ult OUTPUT ( -) HIGH, P (+) HIGH, P

IIIPLATIOIf (+) HIGH, P (-) LOW, T

INTBRBST RAft (+) LOW, T (+) HIGH, P

SPAIII 0UTP1JT (+) LOW INITIALLY THEN (-) LOW, P (+) HIGH, P

IIIPLATIOlt (+) HIGH, P (-) LOW, T

JIITBltKS'l' DD (+) LOW, P (+) LOW, P

-

Note I T stands for transitory, P for Persistent and A for Almost.

RU.

( -) A. NULL (+) HIGH, P (+) VERY HIGH, P

(-) A. NULL

(+) HIGH, P

(+) VERY HIGH, P

(+) A. NULL (+) LOW, T

(+) VERY HIGH, P i NULL

NULL

(+) VERY HIGH, P

biggest impact being contemporaneous; for Spain it is negative, low and

persistent, also, but the magnitude of the impact peaks with a 3 period

delay. This could be due to the political decision of delaying initially the

adjustment to the oil shocks.

The responses of European inflation to the common shocks are

found to be more asymmetrical than in the output case. As one would

expect, the impact of the oil price disturbances on European inflation is

positive. However, its magnitude differs across countries: it is lowest on

German inflation, besides being transitory. For France the effect is

highest and persistent. For Spain and the UK it is also high and

persistent. As for the rest of the "common" shocks, the US output effects

on European inflation are positive, low and persistent for Germany and

France, yet negative and transitory for Spain and the UK. A negative

sign is consistent with a real business cycle explanation: output

fluctuations are associated with productivity shocks, i.e. with supply

shifts that lead to generalised countercyclical prices. The positive sign

could reflect an additional transmission to European aggregate demand.

In any case, the magnitude of the impact on Europe's inflation is small

(around . 10 of a standard deviation). There is also a wide range of

responses of European inflation to US interest rate shocks. As detected

in the variance decomposition, there is a strong, positive and persistent

impact on German and French inflation. For the UK the response is also

positive, yet low and transitory. For Spain, there is no effect.

Coordinated monetary policies, in the sense of joint reductions in the

inflation rates, should be reflected in a negative sign. The positive sign

may be better interpreted as the transmission channel of US fiscal and

monetary policies on German, French and UK inflation via nominal

exchange rate appreciation.

Table [4] also contains the responses of European interest

rate.s to these common shocks. There is a symmetric response to US

interest rate innovations: positive, very high and persistent. This is

. consistent with a US dominance of the world financial markets. For the UK

interest rate there is also a strong effect coming from US output changes,

with a positive sign. In addition to the output linkages between the US

and the UK, there seems to be a high sensitivity of UK savings to US

-20-

output shocks, a possible sign of British direct investment overseas: a

positive US output shock (say, an increase in productivity) may shift UK

savings overseas and increase interest rates at home. For the rest of the

countries this effect is much lower and, in some cases (France),

transitory. Finally, the impact of oil price shocks on European interest

rates is positive, but of diverse magnitude and persistence: low and

transitory for Germany and the UK, low and persistent for Spain and very

high and persistent for France.

Besides these asymmetries, there is no cross-country relation

(direct or inverse) between output, inflation and interest rate effects of

oil shocks: there are countries in which the oil impact on inflation and

output is large (the UK), yet the interest rate impact is weak. For other

countries (Germany) the oil impact is low in all its variables. For others

(France) it is very high in nominal variables, inflation and interest rates,

but not in output. In others (Spain) it is high in output and inflation, not

in interest rates. This may indicate the ability of the German economy to

accommodate oil shocks, while for the rest of the European economies the

impact is high and persistent for at least two of the three variables

considered.

To summarise, the "common" shocks, which are a priori

susceptible of being accommodated in a coordinated way from a European

perspective, are far from being "symmetric". In this category we include

those which are transmitted in a similar way to all variables in all

countries. Strictly speaking, the only symmetries are detected from US

output to European outputs and from US interest rates to European

interest rates. There are fairly symmetric responses of European output

to US interest rates. The oil shock is, however, its common origin,

transmitted in a quite different way both to European real activity and

interest rates. The transmission of oil shocks to European inflation is

more symmetrical, except for the German case. It is interesting to notice

the similar reaction of both German and French's inflation rates to the US

output and interest rates shocks, a transmission that differs from that of

Spain and the UK, which can also be considered in a block. Finally, the

transmission of US output to European interest rates is highly

asymmetrical.

- 21 -

Symmetries:

US output on European output

US interest rates on European rates

US interest rates on European output

Weak asymmetries:

Oil price on European inflation (except Germany)

US output on European inflation (two blocks: Uk and

Spain, France and Germany).

Strong asymmetries:

Oil price on European output and interest rates

US output on European interest rates

US interest rates on European inflation

It could be argued that some of these asymmetries could come

from a lack of coordination in the past, in particular those regarding the

impact of US variables on Europe. But for the external oil shock

transmission, wich are actually the most asymmetrical, this interpretation

can hardly be sustained.

On a country by country basis, comparing pairs, we detect the

following set of coincidences of the nine common responses considered:

Germany-France: 6

Germany-UK: 3

Germany-Spain: 3

France-UK: 2

France-Spain: 2

UK-Spain: 4

If we compare trios of countries, we can report the following

set of coincidences:

- 22 -

Germany-France-UK: 2

Germany-France-Spain: 3

Germany-UK -Spain: 2

France-UK-Spain: 2

As mentioned above there are only two cases in which the

response is strictly coincident for the four countries: that of European

interest rates to US interest rate and European output to US output.

We can conclude from these sets of coincidences that the

responses to external common shocks are more likely to be symmetrical for

a group of two (Germany and France) while UK and Spain seem more

"idiosyncratic" .

3.2.2 Europe facing "own" shocks

We now report on the impulse-responses of European variables

to idiosyncratic shocks: innovations in output, inflation and interest rates

in each of the European countries. We will group together the 9 possible

interactions considered in 4 categories:

Output transmission

Inflation transmission

Interest rates transmission

Cross-effects

All the results are summarised in Table [5], in which own

effects are ignored, given that our purpose is to highlight the

interdependence mechanisms. We also exclude the effects running from

Spain to the other European countries, since they are null.

-23-

. •

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The impact of output shocks, as expected, is positive or null.

It is very high and persistent from Germany to France, high from

Germany to Spain, low and persistent from the UK and France to Spain,

low and transitory from Germany to the UK. The fact that Table (5) is

basically null above the diagonal means that the hierarchical ordering

prevails in the output transmission. The "locomotive" argument is,

therefore, valid for Germany-France-Spain, but it does not apply so

clearly to the United Kingdom, except for its in�eraction with Spain.

As Table [5] shows, the evidence suggests a low inflation

transmission within European countries. Such a claim has to be taken

cautiously, given that our sample period includes high flexibility in

nominal exchange rates. Such flexibility may allow important inflation

differentials for long periods. When an inflation transmission is detected

it is, as expected, of a positive sign, except from the UK to German

inflation rates. In any case, the effects are of a low magnitude, albeit

persistent. It is interesting to remark that, as compared with the output

transmission, there is not such a clear hierarchical ordering in the

inflation spillovers. We detect those mentioned from Germany to France

and then to Spain, but also spillovers running from the UK to France and

Spain.

When we considered the transmission from US to European

interest rates, we concluded that the positive response was symmetric:

positive, very high and persistent. Interestingly enough, when analysing

the transmission of this variable within European countries, the results

are quite different, as shown in Table (5). Germany seems to be playing

in Europe the leadership role of the US at a worldwide level: there is a

positive, low and persistent response of French, UK and (lagged one

period) Spanish rates to German interest rates. The remaining interest

rate interactions are, although persistent, of a low magnitude.

Of the six possible interactions for each country left to

. analyse, we consider those which are significantly different from zero.

(See Table (5)). There are some interesting output-inflation

transmissions detected, such as those mentioned at the worldwide level.

Here, these are positive and low (with a diverse degree of persistence)

- 25 -

running from French output to German and UK inflation. The response of

Spanish inflation to German output is negative, as it was in the US­

Spanish case. There are also some positive (low and persistent) responses

of French and Spanish inflation to German interest rates shocks. Finally,

we also detect so�e effects on Spanish interest rates from European

output shocks, negative in the short run, becoming positive later. A

positive sign could be consistent both with real business cycles and with

demand -pull fluctuations.

To summarise, there are strong output transmissions in a

"locomotive" sense: from Germany to France and then to Spain. There are

also persistent interest rate transmissions with Germany playing a leading

role. However these are not as strong within Europe as from the US to

Germany and France. Regarding inflation, there is a substantial degree

of isolation, possibly as a result of the nominal exchange rate flexibility.

The United Kingdom is the most isolated country within Europe in terms

of the GDP locomotive but integrated with Germany in terms of interest

rates. Germany seems to play a leading role specially on output (France

and Spain) and on interest rates (regarding UK and France, and Spain

with a lag). Spain is, in terms of output, highly dependent on other

European countries, in particular on Germany, and to a lesser extent,

France.

The following list summarises the interactions among the

European variables. The numbers indicate, from a total of 9, the

interactions for which a significant (positive or negative, high or low)

value is detected. Persistent effects are indicated in brackets.

Significant spillovers (of which, persistent) :

From Germany t o France: 4(4)

France to Germany: 2(1)

Germany to UK 2(1)

UK to Germany 0

France to UK 1(0)

UK to France 2(2)

Germany to Spain : 6(5)

-26-

France to Spain :

UK to Spain 5(4)

4(3)

From the list , we may conclude that Spain to Germany, Spain

to France , Spain to the UK and France to Germany are the pairs of

countries with a strongest link .

4 . ALTERNATIVE IDENTIFICATION SCHEMES

Although conditional on the identification scheme described in

Figure 1, the results in the previous section are only partially dependent

on it. We should remark at this point that our identification method does

not restrict the dynamic interactions among variables .

Several characteristics of the chosen identification scheme may

be specially controversial. The first is the triangularisation of the world

and domestic European blocks , in which output leads interest rates, a

"classical" direction of causality . This implies that interest rates may

affect output only with a delay whereas they may have an endogenous

response to current economic activity . The assumption (plausible in

principle) may be questioned because of the annual frequency of our data

set : a year is probably too much of a delay . To assess the dependence of

the results on this assumption, the model was estimated inverting the

order of output and interest rate within each block (both world and

domestic European) so output could respond contemporarenously to

interest rate but not vice versa , a "demand determined" setup.

Interestingly enough , except for a slight increase in the responses of

European output growth rates to US interest rate shocks(S) J the

interdependence results were not affected .

A second questionable characteristic of the scheme presented

in Figure 1 is the imposed output hierarchy between Germany, on the one

(8) In terms of variance decomposition, the only significant increase (around 10%) was in the US interest rate variance share in French output growth rate.

- 27 -

hand, and France and UK, on the other. We let German economic growth

have a direct contemporaneous effect on that of France and UK but not

vice versa . When the model is estimated allowing for current output

feedback from France and UK to Germany, we only detect changes in

terms of European output interactions , being of a large magnitude (see

Table [ 6 ] ) . Specifically , on average , the shares of European. shocks

(except own) in German, French, UK and Spanish output growth rates

are estimated to be 46, 55, 24 and 34%, respectively . Such an increase is

exclusively due to higher output interactions , with the UK playing a

surprising leading role . Comparing these with the corresponding numbers

in Table 1 ( 3 , 35 , 8 and 35%) we conclude that the data appear to be

compatible with a wide range of output interactions within Europe, both

in terms of levels and of distribution of the explanatory power(') .

Our identification scheme does not allow for contemporaneous

effects of domestic inflation on domestic interest rates . This amounts to

ruling out potential current monetary policy reactions and indirect effects

through expected inflation . Again , the annual frequency of our data set

makes this a questionable assumption. When we estimate the model

relaxing this restriction , the only significant changes are a shift in the

explanatory power of Spanish and French interest rates (about 10%) from

the US interest rate to the oil price disturbances, and a higher share of

oil shocks in French inflation rate variability (an additional 1 0%).

When the model is estimated relaxing simultaneously the above

restrictions , the results are linear combinations of those obtained when

each is incorporated one at a time.

(9) We should mention that , according to the Schwarz criterion for model selection, the model with output "hierarchy" (Figure 1) dominates the model with current output feedback from France and UK to Germany. This was also the case when we estimated models using even less restrictive identification schemes . We do not think, however, that likelihood differences are so clear as to conclude that the data allow for full discrimination among alternative identification restrictions.

- 28 -

1il I

Table 6

AL'rBRIIATIVB IDBlft'IPlCA'l'IOIII SCmDtlh IJrrBltDBPBRDDCB A-.a IfDROPBU 0D'l'PUT8 QlUARCB DBCOIPOSI'l'IOIIII PB:RCBRTAGB 01' IfDROPUR 00TPU'l' VlUUUCI

BIPLAIlIBD BY WORLD JUID IfDROPBAIf (JttCBP'l' OMR) SIIOCJUO

IIUlILD US'!' OJ" IfDROPB(1)

rorAL OP ros RDS rorAL GBIUII\IIY PRAIICII lJl< SPAI.

.......... 34.4 3.3 30.0 1 . 1 46.5 . 5 . ' 40.6 0.0 ( 3 . 3 ) (1.8) (3.5) (1.2) (5 .9) (1.8) (3 .5) (0 .0)

........ 16.7 4 . 2 11.4 1 . 1 55.3 16.5 . 38.8 0.0 (4.7) ( 2 . 9 ) (4.1) (1.3) (4.11 (3.1) (4.0) (0.0)

"" 38.0 20. 1 17.0 •• 23.9 18.6 5.3 • 0.0 ( 4 . 4 ) (3.4) (4.6) (l oO) (3.3) (2.8) (1.4) (0.0)

SPlUII 21.9 3.5 17.0 1.4 34.2 9 . 4 4 . 2 20.6 .

( 5 . 9 ) (3.3) ( 5 . 2 ) (1.8) (4.3) ( 2 . 2 ) ( 1 . 4) (4.2)

Hate: The number in each cell is the average of the variance decomposition and ita corresponding standard

error in the first and sixth forecaat error .

(1 ) i� country output variance explained b y country j . i output plus prices plus interest rate hock • •

5 . SUBSAMPLE ANALYSIS: 1964-1978 AND 1979-1991

In order to detect possible changes associated with

developments in the European exchange rate regime 'and the economic

integration process, we divide our sample into two subperiods:

- 1964-1978: a period that includes the end of the

Bretton-Woods system and the first oil shock, and which is

characterised by high real growth rates followed by a deep

recession, a generalised inflationary process followed by

disinflation and an upward trend in nominal interest rates .

- 1979-1991: a period that includes the second oil

price increase in 1979-80 and the oil price collapse in 1986 . the

birth of the European Monetary System. advances in European

economic integration and substantial trade and financial

liberalisation worldwide. It is characterised by a deep

recession followed by sizable expansion, mainly in the US, a

significant US nominal and real exchange rate appreciation,

disinflationary processes in all countries and a reduction in

nominal interest rates .

In general . during 1979-91 one could expect greater

interdependence in real output and interest rates, due to the integration

processes mentioned above. We should also expect a higher interaction

within European inflation rates as a result of the Exchange Rate

Mechanism. However. the frequency in exchange rate realignments up to

1987 may distort the interpretation of this subsample as a period of tighter

coordination among EMS countries . Finally , one could expect the nominal

exchange rate fluctuations in the US to be reflected in a higher degree of

isolation of the European economies vis-a-vis the United States.

We report the main differences found between both samples

when analysing both the variance decomposition on a variable by variable

basis (Tables [ 7 ] to [ 9 ] ) and the impulse responses of European variables

to all shocks ( Table [ 1 0] ) .

- 30 -

w �

GIIRMlUIY

PRARCB

...

SPAIlf

Note I

(1 )

Table 7

VARIMO DECXlMPOSI'l'ION: PBRCRN'l'AGE 0'" IroROPIlAI'f 0U'1'PUT �O Il%PLADfED BY WORLD MD lWROPBAJf (UOPT OWIC) SBOCItS

....... UST 0'" atmOPE(l)

rorllL 0. rus .us ""'IlL GBlUflIRY ..... "" ... SPAIN

5 1 . 0 3 . 8 4 6 . 3 0 . ' 3 . 2 1 . 3 I . . 0 . 0 ( 2 . 8 ) ( 1 . 8 ) ( 2 . 8 ) ( 1 . 1 ) ( 2 . 2 ) ( . 9 ) ( 1 . 4 ) ( 0 . 0 )

2 4 . 5 2 . 4 2 0 . 0 2 . 1 4 . 4 . 1 . 5 2 . ' 0 . 0 ( 5 . 4 ) ( 2 . 0 ) ( 5 . 5 ) ( 2 . 3 ) ( 2 . 3 ) ( 1 . 1 ) ( 2 . 2 ) ( 0 . 0 )

38.9 2 . 6 3 5 . 4 0 . ' 2 4 . 0 2 2 . 3 1 . 7 0 . 0 ( 4 . 0 ) ( 2 . 4 ) ( 3 . 9 ) ( 1 . 2 ) ( 2 . 7 ) ( 2 . 5 ) ( 1 . 5 ) (0.0)

31.2 22.0 ' . 7 2 . 5 19.6 16.2 . 3 . 4 0 . 0 ( 5 . 4 ) ( 4 . 3 ) ( 4 . 7 ) ( 2 . 9 ) ( 4 . 4 ) ( 4 . 0 ) ( 2 . 4 ) ( 0 . 0 )

4 8 . 3 2 2 . 5 2 5 . 1 0 . 7 5 . 1 3 . 7 1 . 4 0 . 0 ( 3 . 9 ) ( 3 . 9 ) ( 3 . 9 ) ( 1 . 0 ) ( 2 . 2 ) ( 1 . 8 ) ( 1 . 0 ) ( 0 . 0 )

2 9 . 6 1 4 . 8 1 3 . 0 1 . 8 5 . 8 4 . 4 1 . 4 . 0 . 0 ( 6 . 7 ) ( 3 . 3) ( 7 . 4 ) ( 2 . 1 ) ( 2 . 0 ) ( 1 . 8 ) ( 1 . 0 ) ( 0 . 0 )

40.3 2 . 8 3 6 . 4 1 . 1 39 . 5 2 9 . 2 5 . 3 5 . 0 ( 4 . 2 ) ( 2 . 7 ) ( 4 . 5 ) ( 1 . 3 ) ( 3 . 4 ) ( 2 . 8 ) ( 1 . 6 ) ( 1 . 9 )

1 4 . 2 5 . 4 ' . 1 2 . 7 46.7 14.0 8 . 2 2 4 . 5 . ( 7 . 0) ( 3 . 5 ) ( 6 . 6 ) ( 2 . 8 ) ( 5 . 3 ) ( 3 . 0 ) ( 2 . 3 ) ( 4 . 5 )

The number in each cell i s the average o f the variance decomposition and its corresponding standard error i n the first and sixth forae.lt error . In the upper corner the first aubs�ple period (1964-78 ) . in the lower corner the second subs&mple period (1979-91).

ith

country output variance explained by country j�i output plus price. plus interest rate shock ••

CBRIfl\!IY

.... ""

OB I

� I

SPAI.

-Note l

( 1 )

Table 8

VAR:lUCII DBOJMPOSITIOlh PlIRCBM'1'AC& OP KUROPIUUI INPLATI<* YUIAllCII �1IIm BY IIORLD NI[) BtJROP2AIf (BXCIIP'!' OMN) SQOCIC8

-.. RBB'l' OP .0Ra"(1)

TOTAI. OP YOB RUS TO'rAI. GBRIWIY PIWICII OB SPAIN

34.4 ' . 7 5 . ' i9.3 , . . 2 . ' 2 . 0 0.0 ( 3 . 6 ) ( 2 . 8 ) ( 4 . 6 ) ( l . 3 ) ( 2 . 3 ) ( 1 . 5 ) ( 1 . 8 ) (0.0)

18.0 2 . 0 ' . 0 1 0 . 0 5 . 7 . 2 . ' 3 . 3 0 . 0 ( 6 . 0 ) ( 2 . 3 ) ( 4 . 8 ) ( 6 . 0 ) ( 2 . 9 ) ( 1 . 6 ) ( 2 . 5 ) ( 0 . 0 ) ,

39.8 2 7 . 6 3 . 2 ' . 0 B . 3 5 . 7 2 . ' 0.0 ( 4 . 7 ) ( 6 . 0 ) ( 2 . 7 ) ( 3 . 3 ) ( 3 . 2 ) ( 2 . 8) ( 2 . 1 ) (0.0)

25.1 ' . 3 3 . ' 15.2 B . 2 5 . ' • 2 . ' 0 . 0 ( 6 . 2 ) ( 3 . 6 ) ( 3 . 8 ) ( 4 . 7 ) ( 3 . 1 ) ( 2 . 2 ) (1. 7 ) (O.O)

2 1 . 1 • • • 14.5 1 . 7 • • • ' . 2 2 . 2 0 . 0 ( 4 . 5 ) ( 4 . 6 ) ( 2 . 7 ) ( 1 . 4 ) ( 2 . 7 ) ( 2 . 2 ) ( 1 . 7 ) ( 0 . 0 )

4 4 . 4 3 6 . 0 ' . 1 3 . 3 7 . 1 ' . B 2 . 3 . 0 . 0 ( 5 . 9 ) ( 4 . 7 ) (5.1) ( 2 . 7 ) ( 3 . 5 ) ( 2 . 9 ) ( 2 . 0 ) ( 0 . 0 )

38.6 25.6 ••• ' . 1 16.4 ' . 1 3 . 7 3 . ' ( 5 . 8 ) ( 6 . 0 ) ( 4 . 0 ) ( 1 . 7 ) ( 4 . 2 ) ( 3 . 5 ) ( 2 . 2 ) ( 2 . 3 )

2 6 . 1 18.0 ' . 1 ' . 0 11. 7 • • • 2 . B ' . 0 . ( 4 . 6 ) ( 2 . 0 ) ( 4 . 2 ) ( 2 . 8 ) . ( 4 . 2 ) ( 3 . 3 ) ( 2 . 2 ) ( 2 . 4 )

The number i n each cell is the average o f the variance decomposition and its corresponding standard error i n the first and sixth forecast error. In the upper corner the first 8ub.ample period (1964-78 ) . in the lower corner the second suboample period ( 1979-91 ) .

i�

country inflation variance explained by country j�i output plus price. plus intereat rate shock • .

"1IIIMlIRY

.......

.. I

tl

SPAt"

Notel

( 1 )

TorAL

52.8 1 2 . 5 )

6 6 . 5 ( 4 . 0 )

64.8 ( 2 . 1 )

70.3 ( 4 . 0 )

5 4 . 5 ( 4 . 2 )

3 1 . 1 ( 4 . 9 )

5 9 . 4 ( 3 . 7 )

44.8 (4. 5 )

Table 9

VARIMClI: DBOOKPOSITIOth PBRCBNTAGB DJ' BIJROPKM IRTBRBBT RA'l'B VUIMCB 8XPLAIRKD BY WORLD IUfD BOROPBM (OCBPT OMR) SJIOCKB

WORLD

OP roB RUS

7 . ' ' . 2 40.8 (1. 9) ( 3 . 7 ) ( 3 . 5 ) ' . 5 5 . 8 5 1 . 2

( 1 . 9 ) ( 3 . 9 ) ( 4 . 2 )

14 . 5 1 . . 48.7 ( 7 . 4 ) ( 1 . 7 ) ( 3 . 4 )

1 1 . 3 ' . 2 5 4 . 8 ( 3 . 1 ) ( 2 . 2 ) ( 3 . 9 )

5 . ' 11.8 3 7 . 3 ( 3 . 9 ) ( 6 . 6 ) ( 5 . 7 )

3 . ' 7 . ' 2 0 . 1 ( 1 . 4 ) ( 5 . 4 ) (3 . 4 )

• . 1 10.8 3 9 . 5 ( 5 . 7 ) ( 5 . 1 ) ( 3 . 4 )

7 . 1 • . 1 3 3 . 6 ( 2 . 2 ) ( 2 . 1 ) ( 3 . 5 )

TOTAL .........

3 . 5 ( 1 . 8 )

3 . ' . ( 4 . 2 )

4 . 5 3 . 1 ( 1 . 5 ) ( 1 . 2 )

15.8 13.6 ( 3 . 6 ) ( 2 . 4 )

' . 2 3 . 7 ( 2 . 5 ) ( 1 . 9 )

19.4 18.5 ( 2 . 2 ) ( 1 . 9 )

2 0 . 6 12.0 ( 3 . 4 ) ( 2 . 1 )

' . 8 3 . 1 ( 3 . 3 ) ( 1 . 7 )

BST 01' BOROn( 11

....CB

1 . 5 2 . 0 ( 1 . 1 ) 1 1 . 5 )

1 . 1 (O.8)

1.. ( 1 . 0 ) .

2 . 5 ( 1 . 6 )

. . ( .8)

• • • ' . 0 ( 2 . 0 ) ( 2 . 4 )

2 . , ( 1 . 2 )

Ill< SPAI"

0 . 0 ( 0 . 0 )

2 . 3 0 . 0 ( 1 . 7 ) ( 0 . 0 )

0 . 0 ( 0 . 0 )

2 . 2 0 . 0 ( l . 7 ) ( 0 . 0 )

0 . 0 ( 0 . 0 )

. 0 . 0 ( 0 . 0 )

4 . 3 . ( 2 . 0 )

The n�er i n each cell i e the average o f the variance decomposit1on and 1ts corresponding atandard error in the f1rst and a1xth forecaat error . In the upper corner the firat aubaample period ( 1964-78 ) , in the lower corner the aecond aubsample per10d ( 1979-91 ) .

i�

country 1ntereat ratee variance explained by country j _ i output plua pricee plua inter.at rate shocks.

Table 10

AVBRAGB RBSPQlfSB OF EDROPKM VMtIABLES TO "COMMON SHOCKS"

OP ms ROS 1964-7B 1979-91 1964-7B 1979-91 1964-78 1979-91 G .......

00'rP0'l (-) LOII,1' (-) A.lfUl.l. (. ) VERY HIGH ,P (') LOW,P �, (-I A. IIUl.l. IHl'LATIOlf (.) LOII, P ( - ) A.lfUl.l. ( . ) LOII,P (-J LOW,1' ( . ) BIGB,P (.) A.BULl. INTBRBST RAT:I PI LOII,1' t.] l.CW,1' (.) LOII, P ( . ) LOII, P ( . ) VEl\Y HIG8,P (.) VEltY IICH,'

PRAIICB i OUTPOT 1-) LOII,P {-I 11GB,P (» VERY 11011, P (-I LOll mE" (.) LOII, P (-) A.lIIIl.l. (-) A.!llJLl. IlIPLATIOK (.) VERl' 11100, P (t) t.Ot,P 1-) LOll mEII (.] I.CM,P (t) A. 1IIlI.I. (-I IIIGII,P (') HIGB,P IIITKRItST RAT:I (.) VEltY IIIGII, P (.) VIi, P (.) LOll,:!' (.) I.OW, l' I'] Vllll.Y HlGII,P ( .) VERY HHlII,P

me 00TPtJT ( -) BIGH,P (-) I.CM,P (.] HIGB,P (.) IIICH,P �, �, IlflLATION ( . ) LOII, P t.) VEIIY BIGH, P t-) VERY HIGB,1' (-) LOII,1' (.) A.lIIIl.t (.) A.!lULl. IRTBRBST RATE t.) LOII,P (.) I.Cl<I,P (.) VERY IIIGH,P I') LOII,P (.) VEl\Y IIIGB,P (-) IIIGB,P

J;: I SPAIn 00TPtJT ( ' ) LOII '1'!IIII 1-) IIIGB,P t.) LOll TIII!" 1-) 1OII,P (.] VERY HICII,P (.] LOII,P �, (-I A.lfUl.t IIfP'LATIOlf (O) VERY HUlB, P t-) BICB 'nIElI (.] LOII,1' (-) LOll. T t.) LOII,1 (-] BIGB l"IIEII (t] LOII,P (0) A.!lULl. IlITKRBST RATE (t) VERI HIGH, P ( .) I.OW,P (_) VERY HIGII 'DmI (.) VEl\Y "ICB,P t.) LOW.1' ( .) VERY IIIGII,P P) Vi:Jl;y IIICH,P

Note ; T stands for transitory, P for persistent and A for almost.

5 . 1 European output

In Table [ 7 ] we present the variance decomposition for

European output in botb samples (upper-left corner for 1964-1978,

lower-right corner for 1979-1991 ) . The left-hand panel of the Table

contains the percentage of the European variable variance explained by

"world" shocks (oil price , US output and US nominal interest rate) .

When comparing the second to the first subsample J a lower

weight for the "world" variables in explaining European real activity is

detected. This is specially true for the US output fluctuations, a result

to be considered when currently using "locomotive" arguments linking the

course of the US economy to European real activity . The US output was

the key variable behind the variance of German output (aimost 50% in the

first subsample) ; it played a similar role in explaining the volatility of

French and Spanish output (35%) and a lower, yet important , role for the

variance of the UK real GDP (25%) . However, in the second subsample this

linkage substantially diminishes , specially for Germany (US output

explains less than 15% of European output variation) . Interestingly , the

degree of interaction between the UK economy and the United States , in

relative terms, suffers something less of a reduction . The weight of the

second oil shock is larger for Spain, and specially for France, and lower

in the UK. It is negligible for German output in either subsample , a result

that shows the German ability to accommodate the oil shocks , as we

mentioned in the preceding section. Consistent with these variance

decompositions, Table [ 10 ] shows that the responses of European output

to impulses in US real activity are also lower in the second sample period .

Regarding the interaction among European variables ( see the

right panel of Table [ 7 ] ) we still find a small role in explaining both

German and UK real activity , a larger role, although not significantly

different, for France; and a more important role for Spanish output . One

could assign, in principle , this effect to the fact that most of the

European economies had gone through trade integration for decades

before this subsample, while for Spain the degree of openness shifts

radically from 1976 onwards, and it changes in favour of EC countries in the last part of the sample . However, it is interesting that the UK is the

- 35 -

country that seems to gain the leader role for Spanish GDP, rather than

Germany or France.

As the small role of European output interdependence detected

for the 1980's is quite disappointing, which variable assumes the lost role

of the US output in most European GDPs? For all of them without

exception, domestic output. For Germany, "ownlt output shocks that

explained 45% of its variability during the 60's and 70's, rose to explain

70% during the 80's and early 90's, an unpleasant result for the European

monetary union process. Dimensionality reasons in our V AR precluded the

introduction of a larger set of variables that could give us a more precise

explanation for this "increasing German idiosyncracy" : German

technology shocks, labour market particularities, fiscal and monetary

policies , disturbances in other economies closely linked to Germany but

unrelated to the rest of the European countries considered, etc. For the

rest of the countries , a similar picture : for the UK , own output shocks

explained 45% of its variance in the first subsample , more than 60% in the

second. For France and Spain , the "closed-economy" result is not so

clear, given the larger role of the oil price shocks (specially for France)

and the larger role of European variables for Spanish GDP. In any case ,

20% of Spanish activity in the first subsample was explained by own output

shocks , 35% in the second. For France the numbers run from 35% in the

first to 45% in the second.

To summarise, we detect generally lower interdependence at

the output level. This result is not new in the literature . Schiantarelli and

Grilli (1990) , using a country by country structural VAR, found internal

shocks to be more important than external ones in explaining output

variability during the 80's, specially in Germany and the UK. Canova and

Dellas (1993) relate business cycle fluctuations with bilateral trade

dependence. In that sense, they also find more interdependence before

than after 1973, a result applicable to a set of industrialised countries .

Although a precise explanation to this smaller interdependence is beyond

the scope of this paper, given the limitations mentioned above, our

conjecture is that idyosychratic shocks (other than oil) have dominated

the second subsample at a worldwide level. We will further elaborate on

this point .

- 36 -

5 . 2 European inflation

Table [8] contains the variance decomposition for European

inflation. Remarkable once more is the substantial increase in the

divergence of the inflation processes of the European countries

considered J interpreted in terms of the percentage variance explained by

domestic shocks. The large variability in the US nominal exchange rate

may have dominated the increasing linkages among European currencies,

so that the inflation convergence process may have been heavily distorted

by US dollar fluctuations.

On a variable by variable basis J we detect a much lower weight

to the oil price shocks in explaining both French and German inflation

variability . For Spain, the effect is not as clear, and for the UK the

opposite occurs. This latter effect becomes apparent even from a direct

comparison of the inflationary episodes in the UK with the oil price

changes during the 80's. These results are also consistent with the

impulse-responses of European inflation to oil price innovations , as

presented in Table [10] .

Contrary to the oil price asymmetry J the roles of the US output

and interest rates regarding the European inflation processes have

contributed to some convergence : the percentage variance shares have

become more homogeneous in the second subsample.

Domestic factors explained 61% of the German inflation in the

60's and 70's, and 76% in the 80's. For France and Spain , own factors also

became pivotal, explaining more than 60% of the inflation variance . For the

UK, however , the opposite took place . In order to further analyse the

internal factors explaining this divergence in the inflation-disinflation

processes, a disaggregation of the contribution of domestic output,

inflation and interest rates is conducted . In doing this we find interesting

differences . German inflation was explained in the first subsample in 44%

by its own process, 4% by output fluctuations and 13% by nominal interest

rate disturbances . In the second subsample, its own process explained

62%, 9% was due to output and only 3% to nominal interest rates. These

facts may indicate a larger role for supply shocks , both technological

- 37 -

(output) and from the labour market (own inflationary process) and a

lower role for nominal demand shocks, either monetary or fiscal (nominal interest rates) . For the UK the results are exactly the opposite : the

shares of "domestic shockstl in the inflation process change from (output, inflation, interest rate) (30, 40 and 1%) in the first subsample to (4, 40 and 5%) in the second. This suggests that the labour market has retained its role in determining inflation, with a larger role for nominal demand policies and a much lower one for output fluctuations . The French

inflationary experience undergoes a change that partially resembles the German one, although with almost no role for other factors than its own inflationary process: in the first subsample ( 1 , 47 and 3%) , in the second

( 4 , 60 and 1%) . For the S;>anish inflation , a composition closer to the French one and a change along the lines of the British experience: ( 2 , 39 and 3%) in the first subsample and ( 1 , 47 and 6%) in the second.

Irrespective of the possible explanations for the internal

factors , we conclude that the existing fixed exchange rate regime between France and Germany has not precluded domestic (fiscal or monetary) policies affecting domestic inflation( lO ) .

5 . 3 European interest rates

Table [ 9 ] contains the variance decomposition for European interest rates. We detect a larger degree of interaction in the s�cond subperiod for German and French rates , since a smaller portion of variability is explained by domestic disturbances . This is consistent with the expected large financial integration followed by market liberalisation

and the reduction of transaction costs . In fact, there is a higher dependence of both on US rates; besides, French interest rates become

more dependent on European variables, mainly German rates. However, it is susprising that, for the 80's, just 13% of the variability of French interest rates is explained by its German counterparts, as compared to

(10) Although this argument may seem more likely for fiscal policies, Stockman ( 1992) has studied the inflation and monetary processes during the Bretton Woods period in different countries, finding a limited transmission of monetary policies and, hence, of inflation rates . However, increasing international capital mobility could weaken this result.

- 38 -

55% explained by US rates and 11% explained by oil sbocks. We have

already mentioned the asymmetric responses of output and interest rates

to an inflationary shock such as an unexpected change in the oil price .

Such an asymmetry holds for France and Germany when considering

separate subsamp1es (see Table [ 1 0] ) . There is no evidence that a more

fixed exchange rate regime has provided for a more homogenous interest

rate outcome through a coordinated monetary policy . As mentioned above J

the frequency in realignments in the period 1980-87 may distort this

interpretation.

For the UK interest rates we estimate a higher interaction with

German rates (16% in tbe second subsample , barely 1% in the first) which

is not significantly different from that of the US rates (20% in the

second) . The percentage explained by domestic factors rises from 40% to

50%, another possible indication of idiosynchratic nominal demand

disturbances .

For Spanish rates we obtain a substantial increase in the

explanatory power of domestic variables from 20% in the first sub sample

to 45% in the second. In fact, as in the UK case, these are mainly due to

own nominal interest rate disturbances : in the first subperiod domestic

output explained roughly 6% of the variance of interest rates, while in the

second the percentage diminishes to 3%. However, its own process moves

from explaining 13% to 42% in the second subsample , again a possible sign

of domestic nominal demand management.

6. CONCLUSIONS

Using a Vector Autoregressive (VAR) approach we have

attempted to characterise the interdependence mechanisms of four

European economies . We identify the model imposing restrictions on the

set of contemporaneous interactions. In particular, we assume that

common external disturbances are a primitive source of variability for

Europe, assuming also a contemporaneous hierarchical structure among

European countries and output leading inte�st rates, BS in a "classical"

setup .

- 39-

The main results for the whole sample 1964-91 can be

summarised as follows :

(i) European output interdependence is not large :

idiosyncratic shocks explain a substantial part of their output variability.

Surprisingly , the oil price is, in general , not found to be a source of

important output fluctuations. In relative terms , the US output plays a

leading role for European output, while Germany plays such a role at a

European level.

(il) the inflation spillovers are even smaller than those of

output . The interaction among inflation rates within EC countries is

surprisingly low and there is no a clear leader country as in the output

case .

(ill) regarding nominal interest rates , the degree of

interaction is, as expected, highest. The US nominal interest rate is the

main source of variability, specially for France and Germany J but within

Europe the degree of interaction among rates is low.

(iv) the main symmetries detected in the transmission

mechanisms of "common" or "worldlf shocks run from US output to

European outputs and from US interest rates to European interest rates.

However, in spite of its common origin, the oil shock is transmitted in a

quite different way both to European real activity and interest rates . On

a country-by-country basis , the responses to external common shocks are

more likely to be symmetrical for Germany and France, while UK and Spain

seem more "idiosyncratic" .

(v) analysis of the transmission mechanisms of "European

shocks" reveals that there are output transmissions in a tllocomotive"

sense from Germany to France and then to Spain . The United Kingdom is

the most isolated country within Europe in terms of the GDP linkages .

There are also persistent interest rate transmissions with Germany

playing a leading role , yet not as strong within Europe as is the US

worldwide . On the inflation side, there is a substantial degree of

isolation.

- 40 -

In searching for robustness on the identification side, we should remark the following:

(vi) when the model Is estimated inverting the order of output and interest rate , as in a "demand determined" setup, the interdependence results are not affected except for a slight increase in the responses of European output growth rates to US interest rate shocks .

(vii) when the Imposed output hierarchy between Germany , on the one hand , and France and UK on the other, is relaxed, we only detect changes in terms of European output interactions, albeit of a large magnitude, with the UK playing a surprising leading role . We conclude that the data appear to be compatible with a wide range of output interactions within Europe .

In order to ascertain how stable the previous results are, the model was re-estimated for two subsamples , with the following results:

(viii) surprisingly, we detect a generally lower Interdependence at the output level In 1979-91 than In 1964-78 . Although a precise explanation to this smaller interdependence is beyond the scope of this paper, given dimensionality limitations, we claim that idiosynchratic shocks have dominated the second subsample at a worldwide level. The substantial increase in the divergence of the inflation processes of the European countries considered is also remarkable. Irrespective of the possible explanations for the internal factors , we conclude that the existing fixed exchange rate regime between France and Germany has not precluded domestic (fiscal or monetary) policies affecting domestic inflation. Regarding interest rates , we detect a larger degree of interaction mainly for France and Germany . This is consistent with the expected large financial integration induced by market liberalization and the reduction of transaction costs . However, it is surprising that , for the 80's , intra-European financial interaction Is much lower than with respect to the US rates . Finally , there is no evidence that a more fixed exchange rate regime has provided for a more homogenous

- 41 -

interest rate outcome through a coordinated monetary policy , although the

high frequency in realignments up to 1987 may distort this intepretation.

- 42 -

APPENDIX 1. DATA

The following annual time series for the period 1964-91 have

been used in this study:

Real GDP. EUROSTAT .

GDP Deflator . EUROSTAT .

Treasury Bill Rate (US and UK) . OEeD.

Fibor Rate (Germany) . OEeD.

Pibor Rate (France) . OEeD.

Implicit Bond Rate (Spain) . MOISEES .

World Average Oil Price ($ per barrel) . DRI .

- 43 -

REAL GDP GROWTH R A TES 0.080

" , ,

, , 0.060 ,

,

, O.O�O ,

0.020 ' ,

, - ' , "

, ,

0.000

,

-.020 US GE

-.o�o 6� 67 70 73 76 79 82 85 88 9 1

REAL GDP GROWTH RATES 0.080

" " "

0.060 ' , , ,

0.010 , , \

, "

, , , ,

0.020 , ' "

" , ,

,

0.000 ,

, ,

,

, ,

, "

-.020 us UK

-.010 61 67 70 73 76 79 82 85 88 9 1

REAL GDP GROWTH RA TES 0.090 ,

" , '

, , , ,

, , , , ,

, ' ,

0.060 , ,

--,

, , ,

, ,

, ,

, , 0.030 , ,

"A, , - ,

" ,

0.000 ,

us sp

-.030 61 67 70 73 76 79 82 85 88 9 1

- 45 -

.30 OE F.

.25 UK

.20

. 1 5

. 1 0

.05

.00 67 70

I N FLAT I ON RATES

73

I I

, '\ I ,

1 \ , \ I ,

I \ \

76 79

INFLA T ION RATES

82 85 88 9 1

.25 ,-----------------------------------------------,

.20

. 1 5

. 1 0

.05

OE F. SP

, /

, , ' , , , / ' , , ,

/ , /

I I

,\ \

\ \

\

,

...... , - - _ / \ _ - - -

61 67 70 73 76 79 82 85 88

- 46-

9 1

INFLA T ION RA TES .30 ,-------------��������----------------_, CE UK

.25 5P

.20

. 1 5

. 1 0

.05

6� 67

\ / /' �

,

I " , ' , ' , 1\ , , , ' " \

I I \ /\ !_ �\' \ , I , " ' I,' ... , I \ , I \ \ /\ / ' , , \, / \ I I 'I �

/ " \ ....... '\ 1\ / ...... J , ' 1 \ , , \. ,; /".--� " \ .... ,; \ ,/-

,-----/�--, , /

70 73 76 79 82 85 88 9 1

O IL INFLAT ION RA T E 2.5 ,-

-------------------------� 2.0

1 .5

1 .0

0.5

6� 67 7.0 73 76 79 82 85 88 9 1

- 47 -

. 1 75 us GE

. 1 50 SP

. 1 25

. 1 00 ,-

-

.075 "

,

.050 ,

.025 64 67

. 1 80 FR

. 1 60 UK SP

. 1 40

. 1 20

. 1 00

.080 -

060

040 64 67

NOMINAL INTEREST R A TES

,-I

",

r ...... ri' , � ,

" •

70 73

/ ' I " , �

,

76

/ - , / ,

I I

, ,

, ,

, , -

, ,

,

79 82

NOM I NAL INTEREST R A TES

\

"

/ \

, ,

70 73 76 79 82

- 48 -

\ 1\ \ ,

I \ \ I , I

\' ,

/ /

, ,

,

, ,

, ,

85 88 9 1

,

\ \ '\

11 ' \ \ /1 \ \

\ "

I '\/ "

, , '

85 88 9 1

APPENDIX 2. PRIOR INFORMATION

The 't vector has ten components , each controlling the following aspects of the prior (the numbers in brackets indicate the optimal setting in this model, t) :

't o ' • • • • • • • • •

'[1 ' • • • • • . . • •

'[2' • • • • • • • • •

'[) ' . . . . . . . . .

'[.' . . . . . . . . . '[5 and '1:6' "

'[7

' · · · · · · · · .

L,' . . . . . . . . .

'[9 ' . . • • • • • • •

first own lag prior mean [ . 7324) overall tightness [ . 0229) other variable lags tightness [ . 3005) lag decay tightness [ 1 . 0000) constant term tightness [ 4 . 9999) time variation in B ; '[5 --0 and 'l15=lamounts assuming a random walk. law of motion for 13 , whereas '[5=0 and '[6=1 imposes Bt(L)=Bt_1(L) for all t [ . 00001 and 1 . 0000) tightness of World variables in European equations [ 1 .4309) tightness of European variables in World equations [ . 10833) tightness of Spanish variables in Europe and World equations [ . 0000)

The prior mean for lags other than first own is set equal to zero . We also experimented with a � vector containing two different first own lag prior means: one for interest rates and the other for the rest of the system. The stochastic structure of the estimated reduced form residuals did not differ. In particular, in both cases the white noise null hypothesis was accepted at the 5% level according to a Portmanteau test (Hosking(l980» for the overall significance of the residual autocorrelations up to lag ten.

The specification of the diagonal elements of the prior Covariance matrix for B is as follows :

1 j

- 49 -

• ( "1",Js "", ) E.( i , 1 ) IE.( j , j ) °ij ( S ) 1 .. j

• ( ",",",1 S "", l E.( 1 , i ) IE.( j , j ) °ij ( S ) = 1 = Europe , j = World

• ("1",,,/s "",lE.( i , 1 ) IE.( j , j ) 1 = World , j °ij ( S ) Europe

• ( ",",",15 "",)E.( 1 , 1 ) IE.( j , j ) 1 = World and Rest °ij ( S )

of Europe, j = Spain

where i=l , . . . ,n represents equation; j=l, . . . ,n endogenous variable;

5=1, . . . ,m lag; and c the constant term.

- 50-

OP YUS

RUS

YGE

tNFGE

RGE

YFR

INFFR

RFR

YUK

INFUK

RUK

YSP

INFSP

RSP

NOTE :

APPBIIDIX 3. IDBRTIPlCATIOJ( SCBKMB

-.0 13 OP + uroB ( -1. 5 )

.011 OP + .138 YUS + U�S ( 1. 8 ) ( 1 . 1 )

.001 OP + .545 YUS + "YGB ( . 9 ) ( 3. 5 )

.002 OP - .036 YGE + .249 RGE + uINFGE ( . 4 ) (-.4) ( 2 . 9 )

1.043 RUS - .042 YGE + URGE ( 5. 3 ) (-.3)

-.002 OP - .069 YUS + .439 YGE + ",... (-.4) (-.6) ( 3. 7 )

.006 OP - .078 YFR + .194 RFR + u1NFFR ( .. 9 ) (-.4) ( 1 . 2 )

.639 RUS + .351 RGE + .146 YFR + uRFR (2.8) (2.1) ( .8)

-.016 OP + .199 YUS + . 347 YGE + "YUl< (-2.0) ( 1.0 ) ( 1 . 6 )

-.0 14 OP - .964 YUK + .438 RUK + " ,NFtllt (-1.0) (-3.8) ( 1 . 3 )

.361 RUS + .266 RGE - .016 YUK + "1Wl< ( 1. 3 ) ( 1. 3 ) (-.1)

.006 OP + .076 YUS + .228 YGE + .517 YFR - .025 YUK + "YaP ( 1 . 1 ) ( . 6 ) ( 1. 3 ) (2.0 ) ( - . 2 )

.013 OP - .437 YSP - .495 RSP + u1lU'SP ( 1 . 5 ) (-1.9) (-1.2)

.456 RUS - . 10 2 RGE - .114 YSP + " .... ( 2 . 8) ( . 9 ) (-1.1)

- Variable names stand for reduced form innovations - t-statistics in parenthesis - The diagonal elements of Eu are, following the order above,

.28295

.00010

.00016

.00049

.00012 :00035

.00019 .00015 .00007

- 51 -

.00030

.000 3 5 .00008 .00072

.00021 .00021

APPENDIX 4. IMPULSE RESPONSES

Each graph contains the average response (in standard deviation units) of the variable labeling the vertical axis to an impulse of one standard deviation to the heading variable. The response is plotted for a time span of six periods with a plus/minus standard deviation band.

OP: Oil price (in 4%) YUS: US output (in 4%) RUS: US nominal interest rate Yi: Output of country i (in 4%) INFi: Inflation rate in country i Ri: Nominal interest rate in country i i : GE = Germany

FR = France UK = United Kingdom SP = Spain

- 52 -

Cl'

� l!o .. +-----:::..,,,::;::::==-�

� ... +---��-=,..--j - --=------=-=: �- - - - .

�- - - - - -� .. +----=::��--I

.�

�.--.... ..:;: - - -- - -- -

- 53 -

- - - - - -

�-­� - -

Cl' YUS

�::..- - - - - - - -- - - -

- - - - - - - - - - --,.- - - - - - - - - - - -

-..,- - - - - -

�- - - - - - - -- - - - - -

- - - - - - - --- - -

-f- - - - - - - - - - - - - - - - -- - -

- - - - -- - -

-,- - - - - - - - - - -

- 54 -

YUS

- - -- - .

-"---

- - - _ .

- - - - - - - - - -

-::.-

- 55 -

� i�l --2�

I I · >F�

1 1 �

�

n I � �l . -- - - ---. 1 1 ---- 1 1 -- u 1 � �l - - - - - 1 1 - - 1 1 -

-� 1 ; �l - --- �--- 1 1 � __ u u_u � 1 . 1 - 1 i t:l - - - - - - 1 1

- - 1 1 -

- u u 1

� tl -� - --. 1 1 - u -

� 1 1 - u_ - 1

� ��l - .--- - --. 1 1 -- - 1 1 - - ---- 1 i ;�l - - - ---. 1 1 . -- - u_- - - 1 1 . - - u - 1 � J - - - - - 1 1 . -- - - - : 1 - - - - - 1 � t:l - --- - - - - 1 1 - - - - -� 1 1 ----- -� 1 � �l - -- 1 1 - - - - - - 1 1 � - - - - - - - I � �l -- - - - - I 1 . . - - - - - - 1 1 .- - --- - - 1

, • , • • I , . , . . . , . . . . I

- 56-

YfO INFFR ""0

, � J 1 1 " . 1 1 1 � jj1 1 I - 1 1 u - - I � j�l , .. -- u I I

-1 1 --- � I

� j�l -- I I .. u 1 1 � - - I

� j�l . -- - I 1 -- - 1 1 -u � I

� J - - I I - 1 1 -- - -. 1 � f:l ' I I 1 1 - 1 � ��l . - m - I 1 ..

. u_- - 1 1 � - u

<1 .. u l l u I ll--�

� ;jl u - - - - 1 1 . - 1 1 f---�- �

� 1 -- - ---, I I - - 1 1 _ .. u __ u � I � ��l u u I j - - I I -

m I , • , • • , " > • • • , . , . . .

-57-

� ��l I I .. I I I � J . - --- - - -- 1 I 11 k H -

�

1 <I � - - - m I I n

- 1 1 -- --

-� I � ��I ____ m --- I I - m -

� 11 . - H_H � I i ��I - . I I - H H - -11 -

- -- I ���I . ---·11 _H

_- -11 -H _ _ I

<I -- I I . �

- 11 - - I <I _ - - --- I I --- . 11 m m

� I <I H I I g

-

- - 11 -- - . . I <I -

- - - - H 11 11 � _

_ H - I � �jl �

H_H ---. I I - -

1 1 . -

H I .

� t:l . - -- - - - - I 1 . H

- I1 - - - H I , , , • • I " .... ,... I •

-58-

OS?

I YS?

I I . . �S?

1 1�=====j ' il I .

1 1 I ! ;I 1 1 • 1 ' �I 1 1 1 1 1 , :'1 1 1 1 1 1 ! :I 1 1 1 1 1 ' �I 1 1

\ \ I � �:I . I 1 1 1 I 1 :1 · 1 1 1 1 1 • ;1 1 1

.u 1 1 k - - - - - - I � ::1 -- - I 1 . . 1 �� � 1 1 ----- 1 1 1 ;;1 .

u 1 1 - , I � :l . . . I I . , , . . . . " . . . " , 1 •

- 59 -

REFERENCES

BLACKBURN, K . and K . RAVN (1991 ) , "Contemporary Macroeconomic Fluctuations : an International Perspective" , Center for International Economics , 1991-12, University of Aarhus .

BLANCHARD, O . J . and D . QUAH (1989 ) , "The Dynamic Effects of Aggregate Demand and Supply Disturbances", American Economic Review, val. 79 , 655-673.

CANOVA , F. and H . DELLAS (1993) , "Trade Interdependence and the International Business Cycle" . Journal of International Economics, vcl. 34, 23-47.

COMMISSION OF THE EUROPEAN COMMUNITIES (1990) , "One Market, One Moneylt, European Economy 44.

DOAN, T . , R . LITTERMAN, and C . SIMS , ( 1984 ) , "Forecasting and Conditional Projection Using Realistic Prior Distributions", Econometric Review, 3 ( 1 ) , 1-100.

DOLADO, J . , M. SEBASTIAN and J . VALLES (1993) , ItCyclical Patterns of the Spanish Economy" . Forthcoming as Working Paper of the Bank of Spain and in Investigaciones Econ6micas .

HOSKING , J . R . M . (1980) , "The Multivariate Portmanteau Statistic" , Journal of the American Statistic Association 75 J no. 371 .

JOHANSEN, S . (199 1 ) , "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian VAR Models" , Econometrica 5 9 , 1551-1580.

KYDLAND, F. and E. PRESCOTT (1990) , "Business Cycles : Real Facts and a Monetary Myth" , Federal Reserve Bank of MinneaI?olis Quarterly Review, Spring, 3-18.

SCHIANTARELLI, F. and V . GRILLI (1990) , "Business Cycle Fluctuations in Open Economies in the 70's and 80's: a Structural Interpretation for some EEC Countries" . Manuscript presented at a CEPR Conference held in Athens , May 1990.

SERLETIS , A. and T . KRICHEL (1992) , "Output Trends in EC Countries and the Implications for Transition to Monetary Union" , Economics Letters 40, 211-21 6 .

SIMS , C . (1986) , "Are Forecasting Models Usable for Policy Analysis?1I , Federal Reserve Bank of Minneapolis Quarterly Review , Winter, 1-16 .

. STOCKMAN , A . (1992 ) , "International Transmission Under Bretton Woods" , NB ER Working Paper 4127 .

- 61 -

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9204 9205 9206 9207 9208

9209

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Victor Garcia-Vaquero: Los foodos de inversi6n en Espana.

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Cristina Maz6n: Margenes de beneficio, eficiencia y poder de mercado en las empresas espanolas.

Cristina Maz6n: El margen precio-coste marginal en la encuesta industrial: 1978-1988. Femando Restoy: Imertemporal substitution, risk aversion and short term interest rates.

Fernando Restoy: Optimal poruolio policies under time-dependent returns.

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Jose M. Goozalez-Paramo, Jose M. RoldaD y Miguel Sebastian: Cuestiones sobre politica fiscal en Espana.

Angel Serrat Thbert: Riesgo, especulaci6n y cobertura en un mercado de futuros diruimico.

Soledad Nuiiez Ramos: Fras, fururos y opciones sobre el MIBOR.

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Javier Santillan: La idoneidad y asignaci6n del ahorro mundial.

Maria de los L1anos Matea: Contrastes de rakes unitarias para series mensuales. Una aplicaci6n al IPC.

Isabel Argimon, Jose Manuel Gonzalez·Paramo y Jose Maria Roldan: AholTo, riqueza y tipos de interes en Espai'ia.

Javier Azci.rate Aguilar-Amat: La supervisi6n de los conglomerados financieros.

Olympia Bover: An empirical model of house prices in Spain (1976-1991). (The Spanish original of this publication has the same number.)

Jeroen J. M. Kremers, Neil R. Ericsson and Juan J. Dolado: The power of coimegration tests.

Luis Julian Alvarez, Juan Carlos Delrieu and Javier Jareiio: Treatment of conflictive fore· casts: Efficient use of non-sample infonnation. (The Spanish original of this publication has the same number.)

Femando C. Ballabriga y Miguel Sebastian: Deficit publico y tipos de interes en la economia espai'iola: i.existe evidencia de causalidad?

Femando Restoy: Interest rates and fiscal discipline in monetary unions. (The Spanish original of this publication has the same number.)

Manuel Arellano: Introducci6n al an:Uisis econometrico con datos de panel.

Angel Serrat: Diferenciales de tipos de interes onshore/offshore y operaciones swap.

Angel Serrat: Credibilidad y arbitraje de la peseta en el SME.

Juan Ayuso and Femando Restoy: Efficiency and risk premia in foreign exchange markets. (The Spanish original of this publication has the same number.)

Luis J. Alvarez, Juan C. Delrieu y Antoni Espasa: Aproximaci6n lineal por tramos a comporta­mientos no lineales: estirnaci6n de senales de nivel y crecimiento.

Ignacio Hernando y Javier Valles: Productividad. estructura de mercado y situad6n financiera.

Angel Estrada Garcia: Una funci6n de consumo de bienes duraderos.

Juan J. Dolado and Samuel Bentolila: Who are the insiders? Wage setting in spanish manu­facturing finns.

Emiliano Gonzalez Mota: PoJiticas de estabilizaci6n y limites a la autonomia fiscal en un <irea monetaria y econ6mica cornun.

Anindya Banerjee, Juan J. Dolado and Ricardo Mestre: On some simple tests for cointegra· tion: the cost of simplicity.

Juan Ayuso and Juan Luis Vega: Weighted monetary aggregates: The Spanish case. (The Spa* nish original of this publication has the same number.)

Angel Luis G6mez Jimeoez: Indicadores de la politica fiscal: una aplicaci6n al caso espaiiol.

Angel Estrada y Miguel Sebastian: Una serie de gasto en bienes de consumo duradero.

9306 JesUs Briones, Angel Estrada e Ignacio Hernando: Evaluaci6n de 10s efectos de reformas en la imposici6n indirecta

9307 Juan Ayuso, Mana Perez Jurado y Fernando Restoy: lndicadores de credibilidad de un regi­men cambiario: el caso de la peseta en el SME.

9308 Cristina Maz6n: Regularidades empiricas de las empresas industriales espanolas: L.existe correla­ci6n entre beneficios y participaci6n?

9309 Juan Doiado, Alessandra Goria and Andrea Ichino: Immigration and growth in the host country.

9310 Amparo Ricardo Ricardo: Series hist6ricas de contabilidad nacional y mercado de trabajo para la CE y EEUU: 1960-1991.

9311 Fernando Restoy and G. Michael Rockinger: On stock market returns and returns on invest­ment.

9312 Jesus Saurina Salas: Indicadores de solvencia bancaria y contabilidad a valor de mercado.

9313 Isabel Argim6n. Jose Manuel Gonz8J.ez·paramo. Maria JesUs Martin y Jose Maria Roldan: Productividad e infraestructuras en la economfa espaiiola.

9314 Fernando Ballabriga. Miguel Sebastian and Javier vaUes: Interdependence of EC economies: A VAR approach.

(1) Working Papers prior to 1992 are listed in Banco de Espaiia's publications catalogue.

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